AlibomicsMoney and Economics
CONCEPT LESSON

Mental accounting

Treating money differently according to the labels or categories assigned to it.

Why it matters

Categories can make budgeting manageable, but money retains the same purchasing power across labels. Consider the whole financial position as well as individual pots.

A worked example

Someone spends a £100 bonus freely but protects £100 of wages, despite the amounts having the same purchasing power. Labels change the choice.

Illustrative example · simplified assumptions

A common mistake

Ignoring the overall budget because a purchase comes from “bonus money”.

Where the idea needs care

Separate budgets can be useful commitment tools; the concept does not mean every category is harmful.

Apply the idea

Explain this concept using a different example from your spending, work, business or a policy debate. State what stays fixed and what could change the result.

CHECK YOUR UNDERSTANDING
What should be checked alongside a labelled budget?

Read the answer and explanation

Its effect on total resources and obligations. Separate budgets can be useful commitment tools; the concept does not mean every category is harmful.

See the supporting infographicMental accounting: Treating money differently according to the labels or categories assigned to it.

The written explanation above is the main lesson. This image offers another way to remember it.

Sources and further study

Examples and explanations by Alibomics. Numeric illustrations are not current market quotations.